Foreign Direct Investment and Exchange Rate Pass-through: Access to Foreign Markets

We examine the effects of foreign direct investment on exchange rate pass-through. By distinguishing the purpose of foreign direct investment, different hypothesis for production subsidiary and distribution subsidiary can be tested. We are able to find a clear evidence of “power-shift” effect and “elimination” effect of distribution subsidiary, with foreign direct investment data properly constructed to capture the timing of establishment. We also obtained significant downward effect of local production, conforming to the previous research.